TaxTMI 
TaxTMI 
Core Settlement Guarantee Fund, Default Waterfall and Stress Test
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.... Every recognised clearing corporation shall establish and maintain a Fund by whatever name called, for each segment, to guarantee the settlement of trades executed in respective segment of a recognised stock exchange. (2). . . (3). . . (4). . . (5) In the event of a clearing member failing to honour his settlement obligations, the Fund shall be utilized to complete the settlement. (6) The corpus of the Fund shall be adequate to meet the settlement obligations arising on account of failure of clearing member(s). (7) The sufficiency of the corpus of the Fund shall be tested by way of periodic stress tests, in the manner specified by the Board. 3) In order to promote and sustain an efficient and robust global financial infrastructure, the Committee on Payments and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) updated the standards applicable for systemically important financial market infrastructures (central counterparties, payment systems, trade repositories and securities settlement systems) with the Principles for Financial Market Infrastructures (PFMIs). SEBI as a member of IOSCO is committed to the adoption a....
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....he default of members. Core Settlement Guarantee Fund (Core SGF) Objective of Core SGF 5) Clearing Corporation (CC) shall have a fund called Core SGF for each segment of each Recognised Stock Exchange (SE) to guarantee the settlement of trades executed in respective segment of the SE. In the event of a clearing member (member) failing to honour settlement commitments, the Core SGF shall be used to fulfill the obligations of that member and complete the settlement without affecting the normal settlement process. Corpus of Core SGF 6) The corpus of the fund should be adequate to meet out all the contingencies arising on account of failure of any member(s). The risk or liability to the fund depends on various factors such as trade volume, delivery percentage, maximum settlement liability of the members, the history of defaults, capital adequacy of the members, the degree of safety measures employed by the CC/SE etc. A fixed formula, therefore, cannot be prescribed to estimate the risk or liability of the fund. However, in order to assess the fair quantum of the corpus of Core SGF, CC should consider the following factors: • Risk management system in force ....
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....al clearing members) to the Core SGF subject to the following conditions: • that total contribution from CMs shall not be more than 25% of the MRC, • that no exposure shall be available on Core SGF contribution of any CM (exposure-free collateral of CM available with CC can be considered towards Core SGF contribution of CM), and • that required contributions of individual CMs shall be pro-rata based on the risk they bring to the system. CC shall have the flexibility to collect CM primary contribution either upfront or staggered over a period of time. In case of staggered contribution, the remaining balance shall be met by CC to ensure adequacy of total Core SGF corpus at all times. Such CC contribution shall be available to CC for withdrawal as and when further contributions from CMs are received. The above prescribed limits of contribution by CC, SE and CMs may be reviewed by SEBI from time to time considering the prevailing market conditions. 9) Any penalties levied by CC (as per Regulation 34 of SECC Regulations) shall be credited to Core SGF corpus. 10) Interest on cash contribution to Core SGF shall also accrue to the Core SGF....
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....ing steps taken to enhance the Core SGF. Default waterfall 16) The default waterfall of CC for any segment shall generally follow the following order - I. monies of defaulting member (including defaulting member's primary contribution to Core SGF(s) and excess monies of defaulter in other segments). II. Insurance, if any. III. CC resources (equal to 5% of the segment MRC). IV. Core SGF of the segment in the following order: i. Penalties ii. CC contribution to the extent of at least 25% of the segment MRC iii. Remaining Core SGF: CC contribution, Stock Exchange contribution and non-defaulting members' primary contribution to Core SGF on pro-rata basis. V. Proportion of remaining CC resources (excluding CC contribution to core SGFs of other segments and INR 100 Crore) equal to ratio of segment MRC to sum of MRCs of all segments.* VI. CC/SE contribution to Core SGFs of other segments (after meeting obligations of those segments) and remaining CC resources to that extent as approved by SEBI. VII. Capped additional contribution by non-defaulting members of the segment.** VIII. Any remaining loss to be covered by way of pro-rat....
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....adequacy of liquidity arrangements: CC shall ensure that it maintains sufficient liquid resources to manage liquidity risks from members, settlement banks and those generated by its investment policy. CC shall daily test the adequacy of its liquidity arrangements in order to ensure that its liquid resources are adequate to meet simultaneous default of at least two clearing members and their associates that would generate the largest aggregate liquidity obligation for the CC in extreme but plausible market conditions and compare such obligation with the resources mentioned hereunder: a) Cash b) Committed lines of credit available to CC 20) Reverse stress test: CC shall periodically carry out reverse stress tests designed to identify under which market conditions and under what scenarios the combination of its margins, Core SGF and other financial resources prove insufficient to meet its obligations (e.g. simultaneous default of top N members or N% movement in price of top 2 scrips by turnover or 20% movement in price of top N scrips by turnover etc.) 21) Back testing for adequacy of margins: CC shall daily conduct back testing of the margins collected vis-&ag....
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.... d) implement the provisions of this circular by December 1, 2014 and communicate to SEBI the status of implementation. 26) This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market. 27) This circular is available on SEBI website at www.sebi.gov.in, under the category "Circulars". Yours faithfully, Shashi Kumar General Manager Division of Risk Management and New Products Market Regulation Department [email protected] Encl: as above Annexure Standard Stress Test Scenarios Day of Stress test -'S' day Cash Market Segment: Scenario 1: Default by 2 Brokers 1. CC shall compute the 'Cumulative Funds pay-in', 'Cumulative Funds pay-out', 'Cumulative Securities pay-in' and 'Cumulative Securities pay-out' of all members as on the end of pay-in deadline on the 'S' day. For this purpose cumulative payin/ payout of each member's trades (shall include non-institutional trades as well as 2X% by value of those....
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....dered. 2. Any early pay-in of funds/securities shall be ignored. 3. It shall be assumed that each custodian would default in meeting its 'cumulative funds pay-in' and 'cumulative securities pay-in' obligation. 4. Loss: I Securities pay-in failure of the member: It shall be assumed that the failure to bring in securities would result in financial close-out and the clearing corporation would suffer a loss of 20% (at the minimum) of the value of such securities pay-in obligation. II. Funds pay-in obligation failure of the member: The assumed loss on liquidation of securities that would have been paid-out to the defaulting member shall be - a. Group 1 securities - 20% b. Group 2 & 3 securities - 20% scaled up by root of 3. III. Gross loss due to member = (Funds pay-in) + (120% of securities pay-in) -(funds pay-out) - (liquidation value of securities pay-out) 5. Coverage: Clearing corporation shall calculate the gross loss (as per 4 above) for each custodian and assess that against the defaulting custodians' required margins (In case of early pay-in, those margins which would have been applicable had the early pay-in was not made, to be considered. Exce....